Every investor, at the end of the day expects a good return for their hard earned money. Whole Foods Market, Inc. (WFM) is one, which can fetch a good return. With a market cap of $18.8 billion, the company owns and operates a chain of natural and organic foods supermarkets. It operates in the United States, Canada, and the United Kingdom, with a large percentage of its stores in the U.S.

Financial And Other Initiatives

On the basis of net income growth from the same quarter one year ago, the company has significantly outperformed against the S&P 500 and exceeded that of the Food & Staples Retailing industry average. The net income increased by 20.7% when compared to the same quarter one year prior, going from $117.67 million to $142.00 million. Net operating cash flow has increased to $287.00 million or 12.20% when compared to the same quarter last year. Whole Food's revenue growth has slightly outpaced the industry average of 3.9%. Since the same quarter one year prior, revenues have risen by 13.4%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.

A table is being provided below for different ratios of this Austin based company.

Debt-to-equity ratio

0.01

Quick ratio

1.37

Current ratio

1.90

Improved earnings per share

18.8%

WFM's debt-to-equity ratio is very low, and is currently below that of the industry average, implying that there has been very successful managing of debt levels. The company maintains an adequate quick ratio to avoid short-term cash problems. The company has improved earnings per share in the most recent quarter compared to the same quarter a year ago. Over the past two years, WFM has demonstrated a pattern of positive earnings per share growth. It also increased its bottom line by earning $1.26 versus $0.97 in the prior year.

Whole Foods Market has taken a lot of steps in the right direction like launching new products and making opportunistic acquisitions. It has launched a new product line "Engine 2 Plant strong" of plant- based, minimally processed snacks, breakfast items and pantry staples in collaboration with Rip Esselstyn, author and founder of "Engine 2 Diet". WFM has also agreed to buy 6 stores, and planning to reopen them as Whole Foods' stores during 2013 followed by some e-commerce initiatives. It also has taken some initiatives like GMO labeling for seafood, welfare rating for meat, eco-rating in cleaning products etc. which are hard to replicate for its competitors.

Threats

There are certain threats for this high-end grocer. The company is heavily reliant on the U.S. market. If consumer spending declines or unemployment rises here at home, WFM has little opportunity to soften this blow by making up its sales elsewhere.

Another risk has to do with same store sales growth. With fewer than 400 stores nationwide, Whole Foods certainly has room to expand. This would normally provide a strong boost for a stock. However, as WFM has added new stores, same-store sales have suffered. This is going to limit the company's ability, and willingness, to expand if it cannot maintain sales in existing stores prior to opening new ones.

On A Concluding Note

The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and good cash flow from operations.

This grocer has very conscious management, high employee satisfaction, a simple but strong business model, good financials, and excellent growth opportunities. Other strategies are investment in price to broaden its consumer base, shrink control, supply chain infrastructure improvement, leveraging economies of scale. Overall I am pretty bullish about this grocer, and it won’t let its investors down.

Thank you for the contribution. I think few would argue that WFM is a fantastic business. However I would argue strongly that this is not a good investment. By a strict Ben Graham definition this is not an investment at all but rather a speculation.

This is a value investing site and I think it is important to differentiate between a good business and a good investment. There are a couple problems with WFM as an investment. But the biggest one is the valuation. WFM is currently selling for over 36x ttm earnings per share. Graham warned that any business no matter how good was not worth more than 20 times normalized earnings. (Normalized meaning an average level of earnings over the last 3-5 years) so this security fails that test miserably. The problem with paying so dear a valuation is that the business could do great over the next 10 years but the stock price could stay the same as the PE moves toward a more normal PE multiple of say 15 or 16.

The second problem I have with WFM as an investment is that the management doesn't seem to be shareholder friendly. They have greatly diluted ownership by issuing shares over the last 10 years to fund the growth. This hurts the owner (share holder) for the sake of growth. Also they have paid almost no dividends and currently pay less than 1% per year. These characteristics hurt your chances of getting your money back from your investment.

Your point that expansion has hurt same store sales leads me to believe that strong growth will not save us from the high PE.

Peter Lynch was big on buying franchises with room to grow but his big metric was looking for companies w PE/G of less than one to make sure they were fairly valued. So he was OK Paying a PE of 20 as long as the growth trend was greater than 20 so 20/20 would give a PEG of 1 or less. However the 10 year revenue growth has been 11% for WFM. So with a 36 PE the PEG= 36/11 = 3.27 which suggests that the security is overvalued by over 3x's too much.

Therefore I see this as a great company that is way too overpriced to make any money on in the next few years. Like Microsoft in 2002 who had great earnings and great prospects, the company did great over the next 10 years but the stock price went from $35 to $33 in that time and the investors made very little. I believe there is a strong chance that this could happen again with the current situation at WFM.

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